FinCEN issued a final rule (the “Final Rule”) requiring non-bank residential mortgage lenders and originators (“RMLOs”), as “loan or finance companies,” to file suspicious activity reports (“SARs”) and to establish anti-money laundering (“AML”) programs. Under the Final Rule, RMLOs will be subject to AML and SAR standards and requirements that are substantially identical to those applicable to banks and other financial institutions that offer retail consumer banking services and originate mortgage loans. The Final Rule does not require RMLOs to comply with other Bank Secrecy Act (“BSA”) regulations, including, but not limited to, filing currency transaction reports.
Under the Final Rule, a residential mortgage originator is defined as “[a] person who accepts a residential mortgage loan application or that offers or negotiates the terms of a residential mortgage loan.” A residential mortgage lender means “[t]he person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement, or to whom the obligation is initially assigned at or immediately after settlement.” The term “residential mortgage lender” does not include an individual who finances the sale of the individual’s own dwelling or real property. Certain categories of persons are excepted from the Final Rule’s coverage, including a bank, a person registered with and functionally regulated or examined by the SEC or the CFTC, any government sponsored enterprise regulated by the Federal Housing Finance Agency, any Federal or state agency or authority administering mortgage or housing assistance, fraud prevention or foreclosure prevention programs, or an individual employed by a loan or finance company. Additionally, there is a qualified exception for mortgage servicers—mortgage servicers are excepted if they do not extend residential mortgage loans or offer or negotiate the terms of residential mortgage loan applications.
FinCEN noted that the Final Rule is only the first step in subjecting loan and finance companies to BSA regulations, and that the Final Rule presents a definition of “loan or finance company” that could be expanded to include other types of loan and finance related businesses and professions in later iterations of the regulation.
AML Program Requirements
The AML requirements include, at a minimum: (i) the development of internal policies; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs. FinCEN anticipates that each RMLO will tailor its AML program to fit its own size, needs and operational risks.
Under the Final Rule, RMLOs must report suspicious transactions that are conducted or attempted by, at, or through a loan or finance company and that involve or aggregate at least $5,000 in funds or other assets; transactions are reportable whether or not they involve currency. Four categories of transactions specifically require reporting. A loan or finance company is required to report a transaction if it knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part): (i) involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity; (ii) is designed, whether through structuring or other means, to evade the requirements of the BSA; (iii) has no business or apparent lawful purpose, and the loan or finance company knows of no reasonable explanation for the transaction after examining the available facts; or (iv) involves the use of the loan or finance company to facilitate criminal activity.
The Final Rule requires that RMLOs file a SAR within 30 days of becoming aware of a suspicious transaction. FinCEN noted that it intends to establish a uniform electronic form for use by all financial institutions obligated to file SARs, that it intends to phase out the manual filing of paper SAR forms, and that RMLOs will therefore be required to use FinCEN’s electronic, web-based E-filing system to file SARs.
Examination; Compliance Periods
FinCEN, which estimates that the impact of the AML Program and SAR filing requirements will not be significant, has not yet delegated examination authority, and will work with other relevant regulators to develop compliance examination procedures.
The Final Rule will become effective 60 days after its publication in the Federal Register. RMLOs will be required to develop and implement AML program within 6 months after the Final Rule’s publication and will be required to file SARs regarding transactions initiated 6 months after the publication. Goodwin Procter has worked with a broad range of banks, mutual funds and other financial institutions to develop AML programs suited to their individual needs and risk profile.